The Medicare Payment Advisory Commission (MedPAC) has called for a 1 percent increase in payments for inpatient and outpatient hospitals, as well as for physician fee schedule services, in its March report to Congress.

The principal focus of the report is MedPAC's recommendations for annual rate adjustments under Medicare's various fee-for-service payment systems.

The report includes payment policy recommendations for 10 payment systems: hospital inpatient, hospital outpatient, physician and other health professionals, ambulatory surgical center, outpatient dialysis, skilled nursing, home health, inpatient rehabilitation facility, long-term care hospital and hospice.

"We recognize that managing updates and relative payment rates alone will not solve a fundamental problem with current Medicare FFS [fee for service] payment systems—that providers are generally paid more when they deliver more services without regard to the quality or value of those additional services," according to the report, which was delivered before Congress by Glenn M. Hackbarth, MedPAC chairman.

"To address the problem directly, two approaches must be pursued," Hackbarth continued. "First, payment reforms which are just beginning—such as penalties for excessive readmission rates and linking some percentage of payment to quality outcomes—need to be widely implemented. Second, delivery system reforms, such as medical homes, bundling and accountable care organizations, need to be tested and successful models adopted on a broad scale."

In the absence of those reforms, Medicare payment rates are an important topic, Hackbarth said. "In addition, if Medicare payment rates were constrained, that could create pressure on providers to control their own costs and to be more receptive to new payment methods and delivery system reforms."

MePAC payment update recommendations for the various payment systems include:

• Inpatient and outpatient hospitals – 1 percent increase in 2012. Also, Congress should require the Secretary of Health and Human Services (HHS) to make adjustments to inpatient payment rates in future years to fully recover all overpayments due to documentation and coding improvements.
• Physicians and other health professionals – 1 percent increase for physician fee schedule services in 2012.
• Ambulatory surgical centers – 0.5 percent increase in calendar year 2012 concurrent with requiring ambulatory surgical centers to submit cost and quality data.
• Outpatient Dialysis – 1 percent for calendar year 2012.
• Skilled nursing facilities – No rate change for 2012.
• Home health – Congress should direct the HHS to begin a two-year rebasing of home health rates in 2013 and eliminate the market basket update for 2012. HHS, with the Office of the Inspector General, should conduct medical review activities in counties that have aberrant home health utilization. HHS should implement the new authorities to suspend payment and the enrollment of new providers if they indicate significant fraud.
• Inpatient rehabilitation facilities – No rate change for 2012.
• Long-term care hospitals – No rate change for 2012.
• Hospice –1 percent increase for fiscal year 2012.

MedPAC said it had contemplated a 2.5 percent increase for hospital inpatient and outpatient prospective payment system, but instead "struck a balance among several competing factors" by recommending a 1 percent increase.

"On the one hand, average total Medicare margins are negative. On the other hand, our other payment adequacy indicators are positive. Furthermore, the negative Medicare margins reflect in part the lack of private financial pressure for cost containment, and the set of hospitals identified as efficient have a positive median Medicare margin. Based on these circumstances the MedPAC contemplated an update of 2.5 percent," according to the report.

"However, for inpatient services, changes in documentation and coding following the implementation of Medicare severity–diagnosis related groups in 2008 have created overpayments to hospitals. Current law does not allow full recovery of past overpayments and no action has been taken to stop the ongoing overpayments," the report stated.

Because of these overpayments, MedPAC reduced its contemplated 2.5 percent increase by 1.5 percent, to 1 percent.

MedPAC also expressed concern that significant payment disparities among ambulatory care settings (hospital outpatient departments, ambulatory surgical centers and physicians' offices) for similar services are "fostering undesirable financial incentives."

As a result, physician practices and ambulatory surgical centers are reorganizing as "hospital outpatient entities in part to receive higher reimbursements," an issue that MedPAC will monitor.

In the meantime, it agreed that "the modest update of 1 percent is warranted in the hospital outpatient setting to limit the growing payment rate disparities among ambulatory care settings."

Regarding the physician fee schedule increase of 1 percent, MedPAC said there are a number of positive indicators including:

• Beneficiary access to physician services is good or better than that reported by privately insured patients age 50 to 64.
• Multiple surveys show that most physicians are accepting Medicare patients.
• Service volume per beneficiary continued to grow in 2009.
• Most claims-based indicators for ambulatory quality examined for the elderly improved slightly or were stable from 2007 to 2009.
• Medicare's payment for physician fee-schedule services in 2009 averaged 80 percent of private insurer payments for preferred provider organizations, a figure unchanged from the preceding year.

"In light of these positive indicators and the modest expected growth in physicians' and other health professionals' costs, the MedPAC recommends an update of 1 percent for physician fee-schedule services in 2012."